Wal-Mart on the right track, despite profit taking

A nervous Wall Street is busy taking Wal-Mart share profits this morning (Aug.16) as the retail giant narrowly beat estimates for its second quarter business operations.

Shares are trading down between 2 and 3% in the $72 range in the morning session on heavy volume.

CNBC Mad Money host Jim Cramer said this morning Wal-Mart has delivered big in recent months and there is no reason to think the share price doesn’t have more upside potential once profit-takers run the shares down to roughly $70.

Nearly half of the 29 analysts covering Wal-Mart Stores rate it a buy with an upside target price as high as $85 in the next 12 months.

“The strategies under Mike Duke’s leadership are paying off, and the company's focus on its U.S. operations has been spot on.” Cramer said during his segment on Squawk on the Street.

Other analysts like Budd Bugatch of Raymond James and Chris Horvers of J.P. Morgan say Wal-Mart is still one of the best defensive stock plays for investors today. Horvers said some of the best news in the Wal-Mart report was how strong July traffic and sales were.

Bill Simon, president of Walmart U.S., noted in the earnings call, “Customers are responding to our continued focus on providing the right assortment at everyday low prices. During the quarter, our average comp traffic increase was equal to serving on average, 80,000 additional customers every day of the 13-week period. These visits represented a 0.4% increase in comp traffic, in addition to a 1.8% increase in ticket for the quarter. When I think about our comp in terms of pure customer numbers, it's pretty amazing.”

Part of the strong July results involve back-to-school and back-to-college shoppers. Season to date, key back-to-school apparel categories are up 7%, according to Simon.

Wal-Mart’s consolidated inventory grew 4.4% compared to last year, in line with the company’s net sales increase of 4.5%. On the U.S. side of the business, inventory was up 3.6% versus last year, which was slightly below the rate of sales growth for the second quarter.

Stewart Samuel, IGD North American analyst, said Wal-Mart’s re-focused strategy on its low-price heritage and broadening its range of products is paying off.

“The particularly strong focus on value, supported by its Market Basket Challenge commercials, has clearly resonated well with shoppers,” Samuel said.

With the approaching holiday season in the coming months, Samuel expects to see more focus on low prices for the remainder of this year.

“We should also expect to see the retailer capitalize even more on the investments that it has made in building its digital and online capabilities. Its new online tool ’Classrooms by Walmart’, which digitized almost 55,000 school supply lists across the US, is a great example of how it can blend the innovative outputs from its @WalmartLabs division, its online presence and extensive store estate to develop simple and convenient shopper solutions.” he said.

GLOBAL SLOWING
Chief Executive Mike Duke said international growth has slowed and that the company is cutting back spending on new stores in some emerging markets to focus on increasing sales at existing stores. Analysts agree with Wal-Mart’s strategy to fine-time what they have in light of an unpredictable global landscape.

That said, McMillon was pleased to report every market in the international portfolio delivered positive same-store sales in the recent quarter, despite an unpredictable global economic landscape.

Wal-Mart International posted topline revenue of $32.016 billion in the quarter, compared to $30.099 billion a year ago. Through the first half of fiscal 2013 international sales are up 10.5% from the prior year. The international business represented 28% of the company's total revenue in the quarter.

He said despite a difficult consumer environment and the wettest weather on record in the UK, ASDA gained market share in the second quarter, according to a report from Kantar. He said excluding fuel, net sales grew 3.2%, while comparable sales rose less than 1% as a result of higher ticket averages and slower traffic.

In Canada, sales revenue grew 3.8% and operating income increased compared to last year’s results. Comparable sales in the second quarter increased 0.5%. Ticket and traffic amid the Canada stores were flat against last year.

McMillon says the company will continue to tweak their operations in Brazil and China to get them online with the everyday low price strategy. In the recent quarter both Brazil and China recorded topline revenue growth in excess of 10% from a year ago.

The company’s Mexican business unit also reported a 10.5% growth in total sales, with comparable sales rising 5% from a year ago.

SAM’S OUTLOOK
Sam’s Club president and CEO Rosalind Brewer says the wholesaler is on track see comp club sales grow between 3 and 5% in the third quarter which ends Oct. 26. That forecast excludes fuel sales and is lower than the 5.7% increase for the same period last year.

In the recent quarter, net sales (excluding fuel) were $12.5 billion, up 4.6% from last year. All geographic regions posted good comp performance, Brewer said in the call. Sam's comprises about 12.5% of Wal-Mart Stores Inc. total revenue.

Sam’s Club saw a gross profit margin rate increase of 17 basis points, compared to the second quarter last year, driven by changes in merchandising mix. Brewer said as more retailers invest in pricing strategies that offer more customer value, Sam’s has been diligent in its efforts to mitigate the impact of inflation.

For the second quarter, Sam's retail inflation was between 175 and 225 basis points, primarily in food, versus 200 and 250 basis points in last year's second quarter. Brewer said costs of goods were slightly higher in the quarter which put some pressure on the overall operating margin. At the same time, deflation continued in certain categories like dairy and electronics.

Sam’s Club reports membership income for the second quarter increased 1.6% versus last year.

Brewer said grocery, including fresh and consumables, remains key to driving traffic and attracting new members.

“It is a key differentiator for us in the market place, and as we continue to invest in price, it will remain so. We delivered high single-digit comps in grocery and mid single-digit comps in both beverages and fresh-freezer-cooler, despite deflation in dairy,” Brewer said.